The public facility district was created in 2001. It helped launch the $18.5 million renovation of the Art Deco building on Fourth Avenue that became the home to the Edmonds Center for the Arts, which opened in 2006. Approximately 60,000 people attended events in the theater and the building’s classrooms and gym last year.

The recommendation from the state auditor was made in a so-called finding, the highest and strongest recommendation that can be made by the state agency. It said that the district does not have adequate internal financial controls to separate public and private money, since the two organizations are closely related.

The district’s building has the same name as the nonprofit, Edmonds Center for the Arts. The arts organization uses the district’s building to sell concessions and host fund-raising events. The non-profit Edmonds Center for the Arts exists to support the work of the public facility district.

A small percentage of sales tax collected by both the City of Edmonds and Snohomish County is used to help pay down the debt for the renovation of the 1939 building. Supporters, including individuals, businesses and foundations, donated about $800,000 last year toward the art center’s operation.

The contract between the two organizations will ensure that public dollars are being spent in the way they should be, said Courtney Amonsen, an assistant audit manager for the state auditor. “We didn’t have any concern with how the money was being spent, just making sure they have a solid contract in place,” Amonsen said.

Joe McIalwain, executive director of the Edmonds Public Facilities District, said that the district has already taken action to meet the state auditor’s requirements. The new contract, a two-page agreement, will be in place by the end of September, he said.

Money transfers are made from the nonprofit to the district, McIalwain said. “That’s the only direction those monies are flowing. … No funds have been misappropriated or lost. It’s a matter of putting a policy in place.”

The auditor’s office review was for the 2013 fiscal year. It also made suggestions in the area of accounting practices. The public facilities district hired a new accountant earlier this year and she began working to take steps to address those issues, McIalwain said.

The auditor’s office first pointed out the problem in financial reporting between the two organizations a few years ago, he said. “My only response to that is it’s a small agency. As a small business trying to generate audience and grow, sometimes those projects don’t get addressed as quickly as they should. That’s my responsibility to drive that project forward. I failed to do that.”

The arts center opened just a few years before the onset of the national economic recession. That meant that sales tax revenue dedicated to paying off the bonds for the arts center’s renovations was much less than anticipated.

Payment and interest on the renovation debt is about $700,000 a year. When the sales tax money didn’t cover that amount, the district began borrowing money from the city, in accordance with an agreement approved by the City Council. In 2011, it was $310,176, and last year that amount had dropped to $180,000.

The auditor’s office notes that the district’s general operation revenue increased from $1.5 million in 2012 to $1.8 million in 2013. Sales tax revenue used to pay off building debt increased from $192,546 in 2012 to $215,545 in 2013.

“Over the past three to four years, their financial position has improved dramatically,” said Edmonds Mayor Dave Earling. “It’s such a valuable asset to the community, we need to find solutions, there’s no question about that.”

The district has an operating budget of just under $2 million a year, McIalwain said, with 24 full- and part-time employees.

About 25 touring artists perform at the arts center each year. The building is rented by community groups, such as the Olympic Ballet Theater, on another 100 days per year.